May 10, 2016

Picasso Saved Detroit Lost

Stephen Henderson, with the Detroit Free Press, and Kevyn Orr, Detroit’s Emergency Manager and now a Partner with the law firm Jones Day,, were guest on a segment of OnPoint Radio. Here is the podcast if you wish to listen. Both Henderson and Orr stated the city's bankruptcy was a success and Detroit is much better off as a result. I agree the bankruptcy was needed but the way in which it was implemented was not the best alternative and therefore its success is questionable. Success should be measured by more than how quick the municipality was removed from bankruptcy.

Henderson stated, " the bankruptcy saved us from a financial disaster and left more money for us to provide services". Henderson went on to say that “Orr knows how to maximize the potential for his clients”.

Kevyn Orr stated the purpose of bankruptcy was to “preserve value, stabilize the patient and rationalize the balance sheet.”

Both Henderson and Orr are correct that putting Detroit into bankruptcy was the right thing to do. However, the route that was chosen was not the best alternative to “preserve value and rationalize the balance sheet.” Needlessly giving away billions of dollars of assets owned by the city for pennies on the dollar is tantamount to saving the present by surrendering the future.

Detroit is still financially strapped and at risk of never recovering. This risk is increased because the state of Michigan is controlled by a Republican governor and legislature who are not enthusiastic about pouring more tax dollars into the city and its schools.

Under the rules of a chapter 9 bankruptcy neither the creditors nor the judge can force a municipality to sell or surrender assets to pay debts. So why was it prudent for the city to give away billions of dollars of art owned by the city and stored at the DIA for pennies on the dollar? It is clear that Detroit received $500 million, in present value terms, for the art surrendered. What the art given away was worth is not as clear, but there seems to have been a consensus that it was at least worth $4.5 billion. If this is true the city needlessly gave away at least $4 billion. When a city is cash strapped why give away $4 billion. It does not make sense.


Summary of Detroit’s art and it’s bankruptcy

  • In June 2013 the Emergency Manager submitted a report that listed the art at the DIA as owned by the city
  • In June 2013 Nolan Finley made a statement indicating the art was worth between $10 and $15 billion. Here is a blog referring to a Detroit News article where the value above is mentioned....http://lstrn.us/1pJjBA3
  • There was never an appraisal done of all the art at the DIA. There were two appraisals done of a portion of the collection, one coming in at $4.6 billion. and the other at $8.5 billion.
  • The reason given for transferring $10 billion plus in art to the DIA was to avoid high legal cost. (Somehow I think the high legal cost would have been far below $10 billion.)
One theory is the heirs of the original donors of the art and current patrons did not want the art sold. Further many of these heirs and patrons  were big contributors to Snyder’s reelection campaign which was going on at the same time as the bankruptcy. There may be other reasons for retaining the art versus selling it and using the proceeds to fix the city and its schools. I just can’t think of any. Perhaps Mr. Henderson or Mr. Orr can enlighten us.

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